High-Priced Fuel Syndrome

Governments and economists around the world have not figured out that what the world economy is suffering from, to varying degrees, is “high-priced fuel syndrome“.

High-priced fuel syndrome has a number of symptoms:

  • Slow economic growth, or contraction
  • People in discretionary industries laid off from work
  • High unemployment rates
  • Debt defaults (or huge government intervention to prevent debt defaults)
  • Governments in increasingly poor financial condition
  • Declining home and business property values
  • Rising food prices
  • Lower tolerance for immigrants
  • Huge difficulty in funding retirement programs, programs for disabled, and regular pension plans
  • Rising international tensions related to energy supply

The countries with the most problem with high-priced fuel syndrome are the industrialized countries that are big importers of oil. This is the case because oil has been a particularly high-priced fuel in the past few years. Importing high-priced oil adds challenges of its own, since funds used for imported oil flow out of the country.

Figure 1. Historical inflation adjusted oil price per barrel, (Brent equivalent in 2011$), based on amounts shown in BP’s 2012 Statistical Review of World Energy.

While oil is the biggest culprit in high-priced fuel syndrome, high-priced fuels of other sorts can play a role as well. Natural gas is recently high-priced in Europe and Japan, but not the USA. The higher natural gas price contributes to a higher average energy cost level for these countries.  High-priced renewables, such as off-shore wind and solar photovoltaic, can be expected to act in a similar fashion, because they add to the price challenge customers face.

At this point, Europe is hardest-hit by high-priced fuel syndrome. In part this is because Europe is a big importer of both oil and gas,  and both are high-priced. European countries have also encouraged the use of high-priced renewables, adding to their difficulties.

While many people have laughed at the issue of the world “running out of oil” (or natural gas, or some other substitute fuel), it seems to me that they have basically missed the point. There is always lots of fuel in the ground, or available through devices we create that produce “renewable” fuel. The major issue is that the fuel becomes too expensive for the economy to afford.

The United States, Europe, and Japan were industrialized back when fuels were cheap, in the pre-1972 era (Figure 1, above). The cost structure of government welfare programs (such as Social Security, Medicare, unemployment) also assume that the economy will continue as it did with low-priced fuels. Substituting ever more-expensive fuels can be expected to push a country toward economic contraction, reduction in programs that the economy can no longer afford, and the symptoms listed above.

Why We are Encountering Rising Fuel Prices

When companies begin extracting oil (or natural gas, or coal), they start with the easiest, cheapest-to-extract first. In Figure 2, oil (or natural gas or coal) extraction starts at the top of the triangle, and gradually works down the triangle.

Figure 2. Author’s illustration of impacts of declining resource quality.

As we require more and more fuel, we gradually seek out less-desirable sources of fuels. These fuels tend to be slower to extract, and are more expensive for what we get. They are often more polluting as well.

Oil is the fuel that we recently have had a problem with easy-to-extract supply running low. We had a somewhat similar problem in the mid 1970s and early 1980s. At that point there was still plenty of cheap oil left in areas where we had not yet drilled (Alaska, North Sea and Mexico, for example), so the problem was temporary, lasting only until we could drill more oil.

This time, the problem seems to be permanent. The chief executives of oil companies Total and Shell have been quoted as saying, “The days of so-called ‘easy oil’ are over, making it harder to meet demand without complicated and expensive projects.”(Voss, 2007). Examples of such expensive-to-extract oil include deep-water oil and tight oil that must be “fracked”. The fact that the cheap oil is mostly gone is the major reason why oil prices are higher than they were five or ten years ago. If oil prices had not risen, it is likely that the amount of oil extracted each year would be declining.

There are alternative fuels such as ethanol and biodiesel, but they also tend to be expensive.

Natural gas and coal aren’t immediate substitutes for oil. For example, they won’t act as fuels in most of today’s cars, trucks and airplanes. While there are long-term possibilities for substitution, the high-priced fuel syndrome is today’s problem, not a future problem.

Rising Fuel Costs Cause the Economy to Contract

There are a number of ways rising fuel costs can cause the economy to contract. The problem is that consumers’ incomes don’t rise, just because oil prices rise. If consumers are required to pay more for a necessity, they will cut back on discretionary goods and services. A few examples:

Food prices. If oil prices rise, the price of food tends to rise as well, because oil is used in many ways in producing food: cultivation of fields, planting fields, chemical sprays (herbicides, pesticides), transporting soil amendments, harvesting fields, and transporting food to market.

Figure 3. Comparison of Food and Oil Prices. Food Prices indices are as published by the Food and Agriculture Organization (FAO) of the United Nations, available at http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/
Oil prices are monthly average Brent Oil spot prices, as published by the US Energy Information Administration. http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=rbrte&f=m

Low-income customers tend to be disproportionately affected by rising food prices. They especially tend to cut back on discretionary spending, such as buying a car or going out to a restaurant, in order to be able to afford enough food. As a result, workers in discretionary industries are laid off.

Commuting cost. If oil cost rises, the price of auto travel rises. Some auto travel, particularly commuting, is a necessity. Consumers, particularly lower-income consumers, tend to cut back on discretionary spending, such as vacation trips, to afford essential trips.

Businesses. Businesses are affected in multiple ways by rising oil prices. First, businesses in discretionary industries find that their “unit-sales” are down, because customers are spending more on food and commuting, as a result, need to cut back elsewhere. Lower unit-sales are likely to lead to lay-offs.

In many instances, businesses also use oil directly in the products they sell. For example, airlines use jet fuel. If oil prices rise, they have they either face lower profits, or need to raise prices to recoup their higher costs. This type of price increase further stresses customers’ budgets.

Electricity. While the current US problem is oil prices, rising electricity prices would be expected to have a similar effect. Every business today uses electricity in various ways–electric lights, running computers, running elevators, operating tools of various sorts. If electricity costs rise because of higher natural gas prices or because of greater renewable surcharges, it will raise the cost of the product produced.

Businesses again have the choice of raising the price to consumers, or facing declining profits. If they raise prices, they will be less competitive with suppliers from other countries, who may not be facing rising electricity costs, if their source of electricity (perhaps coal or nuclear) is not rising in price as fast.

If electricity prices rise, consumers’ budgets will be stressed in a similar way to the way that they are stressed by rising oil prices. This, too, can be expected to lead to a cutback in discretionary expenditures.

Follow-on effects. Laid-off workers may move in with relatives and cut back on driving to save on costs. This helps reduce demand for both homes and automobiles. With less demand for homes, housing prices may decline, especially in parts of the country with significant layoffs and plentiful housing supply.

Laid-off workers may default on loans, creating financial distress for banks. Even people who still have jobs may find the hours they work reduced, so that their take-home pay is lower. They too may cut back on discretionary expenditures.

Impact on Governments

Governments suffering from high-priced energy syndrome can expect a number of negative impacts:

  1. Laid-off workers expect to collect unemployment benefits. If there are other kinds of benefits that they might collect under some other program (disability, retirement, low-income assistance), they will want them as well.
  2. If citizens are working fewer hours or laid off, the amount of taxes they pay is lower.
  3. Banks and other industries are likely to need bailing out, as borrowers default on loans.
  4. The government will be faced with direct increases in costs, because the government uses oil to fuel its autos and jets.
  5. The government will face increasing costs on products it buys that use oil, such as asphalt for highway projects.
  6. Local governments may face reduced tax revenue because of declining home and business property values.

Figure 4 below shows US Federal Government Income and Outlays, in recent years:

Figure 4. US Government Income and Outlay, based on historical tables from the White House Office of Management and Budget (Table 1.1). *2012 is estimated. http://www.whitehouse.gov/omb/budget/Historicals

It is clear from Figure 4 that income had dropped at the same time outlay has risen. Even though the crisis is supposedly past, there is still a huge gap between income and outlays. Outlays in recent years are higher than would be expected based on pre 2005 trends, while revenues are lower than would be expected. Revenue would need to be more than 50% higher, to match outgo, for 2009 through 2012 fiscal years.

The amounts shown in Figure 4 are consolidated, so include programs such as Social Security and Medicare, besides “on budget” spending. How many readers could afford to contribute 50% more than they currently pay for the sum of (Federal Income Taxes + Social Security + Medicare funding)? If the government were to actually raise taxes this much, there would be a huge new round of lay-offs, because consumers would find their after-tax income much reduced, leading to even more cuts in discretionary spending.

Needless to say, the US government will do everything in its power to cover up its problems. In a later section, we will discuss how this huge deficit is being hidden.

Note that the only years during which US Federal Government income exceeded outgo in Figure 4 are 1998 through 2001. These years approximately coincide with the time period when historical oil prices were at the lowest level in recent years (Figure 5, below).

Figure 5. Historical average annual oil prices, (“Brent” or equivalent) in 2011$, from BP’s 2012 Statistical Review of World Energy.

Impacts of the Oil Price Increase in 2006 – 2008 Period

While most people now don’t think of oil prices in 2006 as being high, according to Figure 5, oil prices already had more than doubled from 2002 levels by 2006. If we look back at the financial situation in 2006-2007, we see impacts very similar to what we would expect from rising oil prices.

Sub-prime borrowers began to default as early as 2006 (Bernanke, 2007). As mentioned earlier, it was people who were on the “edge” financially who were most at risk of defaults on home loans. Sub-prime borrowers would seem to be on the “edge” financially and thus were particularly as risk, because they lacked the financial qualifications to obtain “prime” interest rates.

Figure 6. S&P/ Case-Shiller 20 City Home Price Data, using seasonally adjusted data. June 2006 is the peak month. Data from http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff–p-us—-

Home prices started to drop in 2006 as well (Figure 6, above), and they haven’t been able to recover yet. We don’t think of homes as being discretionary spending items, but people can’t move into more expensive homes unless their incomes are rising. First-time buyers will also tend to put off purchases, if their financial situation is tight. The construction industry was one of the industries to face large lay-offs.

Defaults on loans caused considerable problems in the financial industry. “Short sales” (in which the sales price of a home is insufficient to pay off the remaining mortgage because the price of a home has fallen) also caused losses to the financial industry. The financial system was not set up with the idea that there may be a systemic problem of this sort. As a result, many banks found themselves in financial difficulty and needed governmental bailouts.

Other industries, such as auto manufacturing and insurance, also required bailouts. These patterns are precisely what one might expect from rising oil prices.

I make arguments similar to these in Oil Supply Limits and the Continuing Financial Crisis. James Hamilton (2009) has shown that the rise in oil prices alone were sufficient to bring on recession in the 2007-2008 recession.

One other important factor also affecting the 2006 to 2008 period was target interest rates. The Federal Reserve Open Market Committee (FOMC) raised interest rates during the 2004 to 2006 period (Figure 7, below).

Figure 7. Intended Federal Funds Interest Rates, as set by the Federal Reserve Open Market Committee http://www.federalreserve.gov/monetarypolicy/openmarket.htm

The basic idea in manipulating interest rates is that low interest rates are supposed to increase economic activity, because low interest rates make it less expensive to buy a car, using a loan, or to take out a home improvement loan. They also make it less expensive for businesses to finance expansion with a loan. Higher interest rates are supposed to decrease economic activity, because of the opposite impact.

Ludlum (2009) reviewed the minutes of the Federal Reserve Open Market Committee (FOMC). The FOMC noticed rising energy and food prices as early as December 9, 2003. It wasn’t until June 2004, though, that the FOMC first raised interest rates, in an attempt to “damp down” demand for oil. The committee’s view (not stated in the minutes, but implied by rising interest rates) was that the rapid expansion of the US economy was leading to rising oil and food prices. The expectation was that raising interest rates would damp down US demand for oil, and bring inflationary pressures affecting oil prices under control. The FOMC continued to raise interest rates by 0.25% at each of its meetings (the minutes repeatedly comment about rising energy and food prices), until the target interest rate reached 5.25% in June 2006). The FOMC did not start bringing interest rates down again until September 2007.

If the problem were really rising US demand for oil, this approach might have worked. In fact, the real issue was rising oil demand elsewhere, especially China, India and other Asian countries. China had joined the World Trade Organization in December 2001, and was ramping up its exports starting in 2002 and 2003. It also didn’t help that world oil supply was not rising very quickly, so rising demand led to rising oil prices.

Figure 8. Oil Consumption for Selected Areas, based on BP’s 2012 Statistical Review of World Energy

The combination of higher interest rates and rising oil prices provided a “double whammy” to the US economy, helping push the US economy into recession. Europe and Japan also experienced major recession. The parts of the world with rapidly growing oil consumption generally did not experience recession.

The Growing Economy Problem

At least part of the reason for the High-Priced Fuel Syndrome is the fact that with all of the world’s debt, there is a need for growth to continue indefinitely. In a growing economy, it is as if we can always “borrow from the future,” because the future is always bigger and better than the past. We start running into huge problems if this is not true.

Figure 9. Repaying loans is easy in a growing economy, but much more difficult in a shrinking economy.

Part of the problem is that repaying loans is difficult in a shrinking economy (Figure 9), because less funds are “left over” after loan repayment. If we think of the situation as a government whose revenues start declining, we can understand what the problem is with repaying debt, plus interest on that debt. (Arguably inflation could play a role for a while, but lenders soon would catch on, and require higher interest to compensate for inflation.)

As long as the economy grows each year (and government revenue is higher), it makes sense for the government (and many others) to keep borrowing.  But if the economy starts shrinking, we have a serious issue, because the government not only needs to stop borrowing more, but it also has to face the prospect of repaying what it already owes.

The situation is not too different for individual borrowers and for businesses. For individual borrowers, the risk is of being laid off from work, and not being able to find new job. For businesses, it is the risk of fewer buyers for their products, and because of this, less revenue in the future. With less revenue, fixed costs become a larger and larger share of total revenue, making it harder to repay debt.

Thus, in a shrinking (or even a flat) economy, debt defaults become more and more of a problem. Banks find themselves in more and more financial difficulty. This is basically the issue referred to earlier, with respect to high oil prices causing loan defaults.

Paying for Social Security and Medicare benefits is another area where growth makes a big difference. If an economy is growing, there is always a growing population of young workers to pay for benefits to the elderly. If the number of workers shrinks relative to the retired population because of high unemployment or few children, funding becomes a problem. This is yet another area where we have been counting on growth to continue indefinitely, to keep the model functioning as planned.

Recent Government Cover Up of High-Priced Fuel Syndrome

We noted above that the Federal Reserve raised interest rates in the 2004 to 2006 period, in an apparent attempt to damp down oil demand. Starting in September 2007, the FOMC took the opposite tack. Instead of raising interest rates, they brought them down, bringing them as close to zero as they could by late 2008. See Figure 7, above. The intent of this move was to stimulate the economy, by making borrowing less expensive.

Then the Federal Reserve decided to go further, and take up what it called Quantitative Easing, which is what other people call “printing money”—buying the government’s own debt, and some related debt.  Target interest rates affected only short-term debt. Through the use of Quantitative Easing, it hoped to lower longer-term interest rates, as well, and thus provide even more of the low-interest rate benefit to potential borrowers. The United Kingdom and the Eurozone are taking a somewhat similar approach.

A major reason for Quantitative Easing (besides the stated business reasons for decreasing interest rates) seems to be lowering the amount of interest payments that the government itself would need to pay. This would help reduce the big gap between governmental outgo and income (Figure 4, above).

A second reason for Quantitative Easing is that it was a way of enabling the huge amount of deficit spending taking place. Without Quantitative Easing, the government would have had to go, “hat in hand”, to the world market, asking for additional loans. There might be a possibility of not all of the loans being sold, or of higher interest rates being required. By buying back a large share of the US’s own debt, it was able to make certain that interest rates would stay low, and that there would be an adequate market for the debt.

Impacts of Government Cover-up

One problem with artificially low interest rates is that the interest rates, in effect, steal from one segment of society, and use it to subsidize a different segment of the economy. The segment of the economy that is “stolen from” consists of pension plans, and people who would otherwise be saving their money, perhaps for retirement, and would benefit from interest income. Part of the reason that pension plans are having so much difficulty with funding now is because of artificially low interest rates. Pensions plans will need to be bailed out, or contributions will need to be much higher, if the system continues with artificially low interest rates.

Another even more major problem is that without a return to growth, there is no nice way to end the low interest rate/Quantitative Easing policy. One possibility is that at some point, the dollar will drop relative to other currencies, and the price of imported oil will become even higher. This will make the situation worse.

Somehow the situation must be resolved. One possibility is that the government will greatly reduce benefits and raise taxes, so as to balance its budget. Alternatively, there could be a major governmental change, perhaps leading to a totally new governmental structure and different currencies. It is possible that there will be hyperinflation, or some type of break in international trade. Countries may trade more with trusted partners, or may require collateral for trade.

Impact of High-Priced Fuel Syndrome on Exporters

This post has mostly been about the impact of High-Price Fuel Syndrome on energy importers, such as the United States, Europe, and Japan. The situation isn’t quite as bad for energy exporters, but they are not completely spared.

Energy exporters are usually in a better position financially than importers, because they collect funds from the oil or other type of high priced energy they sell. These funds can be used to fund government programs. If the energy exporter is fortunate to still have some “cheap to extract” oil left, the energy exporter can perhaps subsidize oil prices for its own people. This approach works much better when population is relatively small, such as Saudi Arabia, than when population is large, such as Russia, because with subsidy, internal use tends to rise, and exports decline.

Even when a country is an energy exporter, high oil prices or other high energy prices can be a problem. One issue is that those who benefit from high oil prices (oil companies, oil workers, local economies, governments that tax oil production) are not the same as the economy in general. For example, if oil prices are high, the major producing areas, such as Alberta, Canada can benefit, even as the rest of Canada behaves much like an oil importer, with job losses.

Another issue is the one illustrated in Figure 3, that of food prices tending to rise as oil prices rise. The Middle East is an oil exporter, but a food importer. If food prices rise at the same time as oil prices, the government finds it necessary to cushion this cost increase for the poor. To do this, they must raise food subsidies, or increase the level of payments to those who are unemployed. Making these changes quickly is not necessarily easy. There is considerable evidence that the 2011 “Arab Spring” uprisings were related to high food prices (Lagi, 2011).

So even for oil exporters, high oil prices may lead to problems.

In Summary

In summary, we are running short of cheap energy, especially cheap oil. High priced oil (or high priced energy of any type) tends to slow down the economy, leading to economic contraction. Our financial system is not made for contraction. Ben Bernanke and others have used artificially low interest rates and Quantitative Easing to try to cover up our current problems, but this is not a long-term solution. At some point, the underlying problems will become evident, and some type of discontinuity will take place. The economic situation will change from one of growth to decline.

Our system of benefits and taxes to pay for those benefits is based on the cost structure that was possible with cheap energy, and the growth that was possible with cheap energy. Very major changes will be needed, if government outgo is to made to match income. Basic programs such as  unemployment, Medicare, and Social Security will either have to be reduced, or taxes raised substantially. Maintenance of huge amounts of infrastructure (such as roads, water and sewer pipelines, electricity transmission lines, and schools) can be expected to be increasingly expensive as well.

It is not clear exactly how the current situation will play out, but a return to cheap energy and robust economic growth seems very unlikely. A more likely outcome is a serious discontinuity, with affected countries much poorer afterward.

References: 

Bernanke, B. S., The Subprime Mortgage Market, Speech at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, May 17, 2007. Available at http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm

Hamilton JH. Causes and consequences of the oil shock of 2007-08. Brook-
ings Papers on Economic Activity
:215e61. Accessible at http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2009_spring_bpea_papers/2009a_bpea_hamilton.pdf; Spring 2009.

Lagi M., Bertrand, K., and Bar-Yam, Y. The Food Crises and Political Instability in North Africa and the Middle East, Complex Systems Institute, 2012 Available at http://arxiv.org/pdf/1108.2455v1.pdf

Ludlum, S. Further Evidence of the Influence of Energy on the US Economy – Part 2, The Oil Drum, April 23, 2009. Available at http://www.theoildrum.com/node/5326

Tverberg, G. Oil Supply Limits and the Continuing Financial Crisis, Energy, 2012, 37 (27-34).

Voss S. and Patel, T. Total, Shell Executives Say ‘Easy Oil’ Is Gone (Update 1), Bloomberg, April 5, 2007 Available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aH57.uZe.sAI

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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192 Responses to High-Priced Fuel Syndrome

  1. PeteTheBee says:

    Wow, that oil price chart is pretty inconsistent with what everyone else reports. For example, look here.

    http://inflationdata.com/Inflation/images/charts/Oil/Inflation_Adj_Oil_Prices_Chart.htm

    Just looking at nominal prices – oil prices hit the 130’s in july, 2008, they’re in the 110s now. So for your char to be correct, $1.20 of today’s dollars would only by a dollar’s worth of goods in 2008. That would map to about 5% annual inflation, or about double of what we’ve been seeing.

    You should go back to your source material and study it carefully, you’ve thrown up a very misleading chart. If oil was currently trading at an inflation adjusted all time high, you’d be reading about it on the front page of the NY times, not on the blog of an obscure doomer. (No offense).

    • Stu Kautsch says:

      Pete, the chart reads “Brent or equivalent” (which is not surprising for a BP chart).
      Brent *was*, historically, lower-priced than WTI. This, as I’m sure you know, reversed about 4 years ago (?can’t remember exactly), and this makes the chart a little funny-looking to Americans.
      Using WTI for the same chart would result in a different shape, but would simply have different distortions.
      The benchmarks are not too exact over a course of decades.

    • I am showing Brent oil price, which is more the European oil price. West Texas Intermediate is typically shown in US papers. It represents a price level for part of US oil (generally related to the center part of the US). The rest of US oil is still more tied to Brent oil prices.

      For a long time Brent and WTI traded at about the same level. In the past couple of years, WTI price has been depressed relative to Brent, because of pipeline and refinery issues. US pipelines/refineries could not handle more heavy crude from Canada (among other issues), and that helped depress oil prices in parts of the US. US papers show only this depressed price that relates to only part of US oil production. (Canada is the real loser in this–they are quite unhappy about the situation. US consumers and refiners benefit.)

      There is also an issue of where the dollar trades relative to the Euro. This has recently helped US oil prices relative to Europe, also helping out US prices relative to Europe.

      As an indicator of world oil costs, Brent price is considered by most to be far better than WTI. It is not even clear that WTI is a very good indicator of US costs–it really needs to be weighted with Brent, to reflect the mix, if the US is able to get away with an average oil cost that is below the world average cost.

      Articles that help explain these issues include

      Why are WTI and Brent Prices So Different?

      Pipeline changes to fix WTI/Brent spread are likely to add new problems

      Why high oil prices are not affecting Europe more than the US

      • PeteTheBee says:

        Nope – still wrong. Brent was trading in the 135 range for most of June 2008. You’re showing up ceiling by 100. So you’re saying the dollar has lost ~30% of it’s value since 2008, or roughly 7% inflation. Nope, nope, nopity nope. You’re doing something funny with the numbers – chopping off the spike or doing some weird rolling average or something.

        I say again – if Brent was hitting the all time inflation adjusted high (if it was, in fact, breaking the high by 10% or more) it would be front page news. The Wall Street Journal has smart financial people (as do the NY Times, the Post, etc) and “all time inflation adjusted high” for any relevant flavor of spot-priced oil is big news. You’re just drawing a goofy graph – or, more likely, graphing data in an odd way. People look at those charts and expect to say the prices tracked by daily close or daily average, not by rolling averages over long time spans (if that’s even what you’re doing, I honestly wonder if you’re just gaming the numbers).

        • PeteTheBee says:

          ahhh, I see it in the fine print. “Annual average”. Geez louise, nice propaganda there. There was a massive price crash in the last quarter of 2008.

          Pretty cheezy. Everyone associates 2008 with a massive price spike. Then you post up a graph that implies that prices have passed the spike. Lame reporting.

          We’re on the undulating plateau of “moderately affordable” prices that the “peak oil realists” (admittadly a small camp) have been predicting for some time.

          Why not graph oil as an overall proportion of the total American energy budget over time? It would be a different graph, showing the high prices of the late 70s as being far more relevant to the American economy.

          I agree with the idea that high oil prices are murdering the “frack free Euro-zone” though, if that’s what you’re getting at. The US is sitting pretty though, we have privately held mineral rights and lots of fossil fuels, of all flavors.

          • Mike Manos says:

            Gail has already noted the response to the claims of “we have [,,,] lots of fossil fuels”.

            It doesn’t matter how much you have when it costs progressively more to extract them from the ground.

            At some point, the price at which you sell your extracted fuel is too high for others to pay, and they will simply not buy your fuel.

          • Robert wilson says:

            During my lifetime oil has traded as low as 10 cents a barrel. It is up about three orders of magnitude

          • PeteTheBee says:

            “Gail has already noted the response to the claims of “we have [,,,] lots of fossil fuels”.”

            I guess the assumption here is that Gail’s crude graph represents some reasonable accounting for shale oil.

            Shale oil costs about $40 bl to extract. So oil priced at $100 is more than enough to insure rapid growth of this energy source. Eagle Ford, Bakken are current proof enough of this. Utica shale will be next.

            Putting up a graph with big arrows doesn’t prove that shale oil is exorbitantly expensive to extract. The $35 to $50 range for shale oil extraction is pretty standard.

            Shale fracking is booming. How can this be happening if it isn’t profitable? Is Gail predicting shale fracking to stop? To decline? If she making similar prediction for the booming business of tar sands oil in Canada? These would be very, very bad predictions. She sort of gives vague hand wavings that these ventures will stop, but stops short of saying were they will be in 2015 or 2020. That’s disingenious – both of these energy sources will be at least 50% bigger in 2020 than they are now.

            • This is a link to a recent post showing that Bakken costs are $80 to $90 a barrel, and rising rapidly. It is hard to see why Eagle Ford would be a whole lot better. Prices are high enough now to cover their costs.

              I don’t say that production of these areas was going to stop. It will stop, when there is recession and prices drop too low, or when there is too much disturbance of the economy. Even if the areas you mention increase production, there is the problem with world production.

              You will note that I did not say anything about declining world production–just high prices. Prices in the current range are too high.

          • Stu Kautsch says:

            Pete asks how fracking can be going on if it is not profitable. One way this can happen has been discussed in the blogosphere for a couple of years vis-a-vis natural gas. Activity is supported by new money being thrown in by investors who have been tricked into believing that the breakeven price is much lower than it actually is. This has been analyzed at length on The Oil Drum among others.
            Besides, many activities are carried on despite not being profitable, because the investment’s already been done and sometimes the month-to-month cash flow is still sufficient to pay distributions (or even dividends).

          • PeteTheBee says:

            “. One way this can happen has been discussed in the blogosphere for a couple of years vis-a-vis natural gas. ctivity is supported by new money being thrown in by investors who have been tricked into believing that the breakeven price is much lower than it actually is. This has been analyzed at length on The Oil Drum among others.”

            Right, analyzed by the Oil Drum, and by the Oil Drum alone. Apparently, fracking is a Ponzi Scheme that will go on forever and ever. The skepticism in 2009 was perhaps a worthwhile counterbalance, the skepticism in 2012 is verging on conspiracy theories.

            At any rate, Bloomberg is part of the conspiracy.

            “Falling costs to find and extract oil from the Bakken is luring producers such as Exxon and ConocoPhillips, according to Jason Wangler, a Houston-based analyst for SunTrust Robinson.
            Costs at Enid, Oklahoma-based Continental Resources, the most leveraged explorer to the Bakken after Whiting, have plummeted about 60 percent to $9.63 a barrel of oil equivalent since 2008, data compiled by Bloomberg. That’s $4.58 less per barrel than Exxon’s expense.”

            http://www.bloomberg.com/news/2011-10-19/bakken-shale-oil-turns-oasis-into-target-as-fracking-costs-slide-real-m-a.html

            Of course, these are extraction costs – there are also transport costs out of the Bakken. Those are going down as the relevant section of Keystone XL has been approved.

            $90 a bl to market oil from the Bakken – that’s a real hoot. You’re not going to find “news” like that outside of the Oil Drum, that’s for sure!

            • Pete,

              What I look at is actions, rather than words. North Dakota drilling rigs are down by more than 10% (from 203 at 6/8/2012 to 181 at 9/28/2012) after WTI spot oil prices dropped from a high of 107.52 on 3/2/2012 to 80.23 on 6/29/2012, and have somewhat recovered. There is a lag in rig count change after price changes, because there are contracts associated with each rig, and existing contracts can’t be gotten out of immediately. But if Bakken oil were really profitable at $50, it is highly unlikely that producers would be sending rigs away. Their actions suggest that a price of $90+ is needed.

              A much deeper drop-off in rig counts occurred after the big oil price drop in mid 2008.

          • PeteTheBee says:

            http://www.petroleumnews.com/pntruncate/139330705.shtml

            So the all in price for the Bakken – probably $50. That’s a number you hear a lot. Definitely not $90.

            They’re marketing more and more of the Bakken natural gas as well, so $50 oil and $5 gas might work. Originally, the Bakken flared a lot of gas, but the infrastructure to capture that is mostly online, and will be complete within 12 months or so. That would be a nice historical average – oil 10X gas, $50 and $5.

            But I suppose it’s all academic. Fracking is and will continue to boom in the US, and the price of oil will stay in the low triple digits or high double digits, and the US economy will continue to outperform the Eurozone. The high oil price will continue to subsidize natural gas production, which will continue to go into the stratosphere. Coal will get driven more and more out of the electrical market, and so the US will export more and more coal. That’s the pattern for the next 2 or 3 years.

          • Stu Kautsch says:

            PeteTheBee, your question was how an unprofitable activity can continue, and I just pointed out one way. (Another good example: Have you ever heard of the “.com bubble”, in which many grossly unprofitable internet firms continued operations by blowing through investors money? Investors continued pouring good money in after bad.)

            I was also using fracked natural gas as an example. That industry is finally shaking out – the number of drilling rigs in the US is falling practically every week, as can be seen at http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm?showpage=na (Baker Hughes’ Rig Count), and has fallen by over 50% in the past year.

            The fracking industry will also run into a lot of political headway because citizens understand that infractions by the fossil fuels industries are almost never punished, and the safest course is to just not allow it in the first place. This has become my personal stance, and will not change until I see some fossil fuels executives going to the pen for 10 years.

          • PeteTheBee says:

            Stu – if by “shaking out” you mean “putting up record production numbers” … then yes, that’s what the industry is doing.

            http://www.eia.gov/dnav/ng/hist/n9050us2M.htm

            If by “political headwinds” you mean “both major presidential candidates strongly support it”, then yes, the fracking industry is facing the headwinds of knowing that, re:less of the election’s outcome, there will be a pro-fracking president for the next 4 years. What other industry can say that?

          • PeteTheBee says:

            “What I look at is actions, rather than words. North Dakota drilling rigs are down by more than 10% (from 203 at 6/8/2012 to 181 at 9/28/2012) ”

            What I look at is production and not rigs.

            http://www.bloomberg.com/news/2012-09-14/north-dakota-s-bakken-oil-output-passes-600-000-barrels-a-day.html

            600 bl per day from the Bakken.

            Here is what you said 4 years ago

            “If we can reach 225,000 barrels of oil per day, the history of Bakken suggest this level would be short-lived – the peak production will probably last for a year or less – because as we shall see below, total Bakken production can be expected to decline to 50% or less of its peak rate within a few years, because of the steep decline rate of individual wells.”

            http://www.theoildrum.com/node/3868

            So the Bakken is now almost tripling the level you thought would only be a “short lived peak”. It’s now clear the Bakken will be producing in excess of 225K per day for the next decade. Don’t you feel at all sheepish when you continue to comment on this particular play? Your 2008 prediction was spectacularly off.

            • You will recall this is not what I said, but that of what a guest poster named Piccolo said. But your point is well-taken, the estimate was too low.

              Higher prices and improved technology can indeed make a difference. We have not seen the long-term runout of this. The fact that number of drilling rigs is falling raises questions, though. This is a leading indicator, not something that shows up in current data. If people were getting more and more enthusiastic about drilling there, the number of rigs would likely rise, not fall.

          • PeteTheBee says:

            It might be helpful for Gail to look at these two charts. I guess she must have missed them in her research.

            The first is http://www.undeerc.org/bakken/pdfs/stateoilchart.pdf oil production in the N Dakota

            The second is the http://ycharts.com/indicators/crude_oil_spot_price – wti spot prices.

            By cross referencing the two – you see pretty clearly that there must not be some “break even” at $90. Oil production in N Dakota absolutely skyrockets throughout 2009 and 2010 – most of this time oil is well below $90.

            Bear in mind there is lots of activity in this area, and there is lots of competition for rigs. Reading a break even price based on a fine grained cross reference between a spot price and the monthly rig count is perhaps silly. One aspect of the business is to drill fewer rigs and get more oil from each one. Clearly, the massive increase in gas and oil production that is occuring with relatively muted growth in rig counts must demonstrate this, even to you Gail.

            • There has been an improvement in technology, agreed, that allows more oil with a single drilling rig. Once this has been phased in, the question then in a what price is this new technology profitable. I would contend that we are likely looking at something like $90 barrel.

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  3. Bill Simpson says:

    And worse, guess what the oil exporters could do, once they realize that global production is declining with everyone pumping as much as they can? I took a walk outside when I figured that out about 2 years ago. That year isn’t too far in the future.
    Hopefully, they will realize that causing an instant global economic collapse by purposefully decreasing exports in order to explode the oil price, would not be in their interest, no matter where they are. Money isn’t much good if there is nothing to buy with it. Collapse of the global financial system would accomplish that. Nancy Pelosi said that Bernanke and Paulson told the leaders in the US Congress on a Wednesday, that if the Congress failed to act quickly, the USA might not have an economy by the next Monday evening. Were they bluffing? Maybe. Maybe not.

    • Oil exporters are finding their own people increasingly unhappy. They need a high price for oil, just to provide programs to pacify their people. If exporters can’t pacify their own people, they risk the possibility of governmental overthrows, and reduced oil production, whether they want this outcome or not.

  4. While Gail’s conclusions are indisputable, I think the scariest aspect to all this is that if you try to put over these stark facts to other consenting adults, you’re looked on as some kind of social pariah. There is a communal certainty that what we’re experiencing now is no more than some kind of industrial hiccup, and that we will be able to carry on with our ‘society on wheels’ like we’ve always done, if only we go on spending more and more money, and that some kind of ‘new technology’ will fix everything. You cannot convince people (I’ve given up anyway) that passing coloured bits of paper or plastic around does not create wealth, and there is no new technology.
    One of the favourite fantasies I have to listen to: Well, if we all worked half as many hours, twice as many people could have a job.

    • I think that there may be some possibilities to “Well, if we all worked half as many hours, twice as many people could have a job.” What would happen is that the most poorly paid jobs would be reduced in hours. Thus there would be even more people who are working, but not earning enough to really support their families. All of these people would be just hourly workers, instead of getting vacation, sick days, etc.

      I am not sure this really would work very well, though. One issue is that even a low-paid worker needs to commute to work. The job split would need to be in a way that does not increase total commuting needs–full days, for example. Another issue is that each of these workers needs to be trained. To some extent, this job splitting has already happened. Cashiers and carry out people in grocery stores tend to be part time workers, since they can be paid less. Some clergy jobs are called part time (even though those in them work 60 hours a week), because the parishes cannot afford more. Nurses in hospitals are often part-time.

      • Johan says:

        Except they already do it in Germany and it works. Not sure if they do it with the poorly paid jobs, but at least this way income is more evenly distributed. You don’t need that much money to get by if you live frugally, which doesn’t have to be a horrible either.

        • Germany is always mentioned as the country that has kept average wages down. This is given as a major reason that they are doing better financially than other countries. I understand they use quite a bit of foreign labor. We have done that in the US too, with Mexican laborers doing work for barely more than minimum wages. I haven’t looked at German data myself.

          • Bob Carver says:

            According to what I’ve read, Germany has been able to keep demand up by paying companies not to layoff workers. Seems like a strategy that would have worked here in the US. Since we’re so dependent on consumer demand, it’s only logical that paying for jobs would help allieviate the short term problem of higher unemployment. It helps workers and it helps the economy. Instead, we let companies layoff massive numbers of workers. This pushed the burden of support onto the government anyway. And left the workers in an inferior lifestyle.

            I believe that someone calculated that had the government bought up all the subprime mortgages, it would have cost $50 Billion, a far cry from what we actually spent (over $10 Trillion). Sometimes ideology gets in the way of common sense.

          • Ikonoclast says:

            Keeping wages down is not necessarily good for your economy if you rely on domestic consumption. Workers need good wages if they are going to be able to purchase the output of an advanced economy.

      • Gail. I think you might be confusing the concept of jobs, hours worked. money, job descriptions and so on. They are details by which we have come to describe our essential means of day to day living. they are not relevant to the actual employment problem.
        In order to survive, it is necessary for each of us (as adults) to expend sufficient effort to obtain enough food-energy to live on. If we don’t we must either persuade someone else to do it on our behalf, or die. To facilitate the former, we have, over millennia, established a trading system that allows this to happen. In nations or regions where the trading (employment) system has collapsed, people are fed by charity, or they die. There is no real shortage of food in East Africa, but millions have no means of buying it. that’s why they are dying. that is your ongoing example of societal/trading breakdown,. Before western ‘civilisation’ interfered with their functioning society, they had a simple pastoral society, with a basic pattern of trade and exchange, it was balanced and it worked perfectly well. Now they are trying to feed tens of millions from a desert environment destroyed by overpopulation.
        Essentially we are heading into the same trap.
        Money, when paid as wages, is merely a tokenisation of work done and it has to be sufficient to buy enough energy (food) to live on. However money is passed around, that is what it does. money has no value in itself.
        So, if I only expend half a weeks’ energy in terms of work, I cannot expect to receive the results of a full weeks’ energy from someone else in payment for it. If I get only half a weeks pay, then by definition I can only expect half a weeks food energy, on which I might have to support not only myself, but my family as well.
        If through some government munificence I receive a full weeks’ wages for a half a weeks’ work, then the difference has to be made up from somewhere. Either the government prints that extra money, or takes it out of the general tax pot. (which means fully employed citizens are making up my pay). There may be a third way, if there is I can’t think of one.
        It can only give the ‘illusion’ of working if the halftimer doesn’t really need a full time job

        • I am not sure I understand where there is a misunderstanding.

          The amount of money a person earns in a week is normally more than food for an entire week, at least in today’s society. It hopefully is enough for clothing, transportation, taxes, debt repayment, charitable contributions, and a bunch of other things as well.

          If people have to work less hours, and get paid less, they have to cut back on what they otherwise would spend. They may not be able to buy clothing. They may have to sell their car, and walk to work, or carpool.

          Whether or not the government prints extra money has essentially nothing to do with how much grain is grown and how much food is transported, especially over the long run. Perhaps over the short run, the government can run up huge deficits by spending far more than it takes in, giving the unemployed money to buy food and clothing. But at some point, this system is going to break down, especially if the imbalance is as great as it is currently. The fact that it hasn’t broken down yet doesn’t mean that it won’t break down.

          • I was trying to strip back the concept of food and earnings to their original roots. Living in a ‘western’ style economy, it takes maybe 5% of hours worked to buy my necessary calorific intake, say 2500cal., based on a nominal 40 hour week. but our agricultural food supply system is so arranged that it takes 25000 kcals of energy to grow and deliver that amount of food to me. Very few of us can ‘grow our own’ to any significant degree.
            That energy 90% energy differential is derived from oil input, tractors, trucks, fertilizer and so on,
            if I work 20 hours a week, my body still needs 2500kcal of energy to stay alive, so my food supply must still get 25000kcal of energy from somewhere.
            the cost of that 25000kcal of fuel is rising constantly, and will go on rising, while my income will not, simply because oil itself is costing more to get out of the ground, which means there is less oil profit to give me a payrise in real terms. (which is why printing money doesn’t add to national wealth..only energy input does that)
            we have created a market environment where the cost of fuel and food are effectively the same thing, each plays leapfrog with the other. which is why my income cannot keep pace with the rising cost of food, no matter what other necessities I cut back on.
            So far I’m not feeling it, because I’m financially secure, but others less fortunate are being badly hit simply because oil prices are driving their food prices higher and higher, and their incomes are stretched beyond breaking point in desperate attempt to stay fed.
            this is why foodbanks are springing up everywhere, things really are that tight.

            • We don’t appreciate all of the work that farmers and the whole distribution system is doing for us now, and how much it keeps costs down. In some parts of the world, lower-income people are spending 30% to 50% of their income (or more) for food. Even in this country, there are family groups trying to get along on one minimum wage job, and finding it difficult to keep up. If the system comes unglued, we are in for a huge change.

  5. yt75 says:

    Another great synthetic summary, thanks a lot for that !

  6. Leo Smith says:

    Nothing to say but well done. Neatly summarises everything I’ve been thinking for years. At least I don’t feel totally mad or alone🙂

    Keep up the good work.

  7. philsharris says:

    Thanks again Gail
    Recent estimates for production costs of ‘tight oil’ or shale oil from Bakken in USA is 80 – 90 usd per barrel, although Rune Likvern in an infomed paper on TOD thinks that the ‘break even’ cost of the average well on Bakken just now is nearer 100 usd. http://www.theoildrum.com/node/9506

    I think that the current link between world prices for oil and traded food prices could be even more important than you outline. I found the following in a recent report UK Sussex University / Oxfam which says:
    Quote:
    “Rising oil prices
    Between late 2001 and July 2008, the price of crude oil rose from less than US$20 to more than US$130 per barrel (Wiggins, Compton and Keats 2010), driving up the cost of fertilizer and fuel inputs, as well as raising transport costs. For instance, when the oil price doubled between January 2005 and July 2008, the world market prices of urea and di-ammonium phosphate fertilizers increased by 3 and 4.5 times respectively. Conversely, when crude oil prices subsequently declined by 44 per cent from July 2008 to June 2010, the prices of these fertilizers declined by around 65 per cent (Development Committee 2011). According to Baffes and Haniotis (2010), the price transmission links between crude oil and agricultural markets have considerably strengthened in recent years. Their estimates suggest that the pass-through elasticity from crude oil to agricultural prices has risen from 0.22 pre-2005 to 0.28 towards 2009. The emergence of biofuels has added an important new transmission channel from oil to crop prices.
    http://www.oxfam.org/sites/www.oxfam.org/files/20120905-rr-extreme-weather-events-crop-price-spikes-en.pdf

    The same Report discusses as its main subject the effects of extreme weather events and their increasing probability and their impact on food prices . For food add vulnerability to weather as well as price of oil.
    very best
    Phil

    • Thanks for the links.

      Part of the issue with oil such as Bakken oil is that we pump out the easiest to get out Bakken oil first, just as we do other oil. So even if the break even is now $100, it is pretty likely to be higher next year, and the following year (unless there are marvelous improvements in technology). This is another point of the post you link to.

      I am not sure how the food fuel link is changing. I know that China uses coal for making nitrogen fertilizer, and is in fact exporting some of this. This would tend to be less tied to oil price. Also, variability in weather is not tied to oil price. The link is not a dollar for dollar one, but even a partial pass through is a problem for consumers.

      • Don Stewart says:

        This may be a cold comfort. I was in soil science class this evening. We saw a stunning example of rotational grazing of cows causing lush vegetation to grow on an abandoned copper mine in Arizona where nothing had grown in 60 years. The next slides in the instructors deck were Alan Savory’s pictures from Africa demonstrating conclusively that it isn’t the amount of rain that falls, it ‘s what you do with it after it falls. Alan Savory visited our county a couple of years ago. Very persuasive presentation on the dynamics of herds of prey herbivores. And yet, still perhaps one percent of the farmers here use rotational grazing. I asked the instructor if there was some overwhelming reason for the reluctance, such as economics, and she replied that ‘no, they could have much larger herds and a healthier ecosystem…the barriers are inertia and a lack of knowledge’.

        Then I asked her to cite the best local example of the soil science principles she is teaching. She cited a personal friend of mine (who shall remain nameless) who has not used added fertilizers of any kind for a number of years and hasn’t used a moldboard plow in 30 years. A very successful farmer for 35 years (which means he hasn’t gone broke as yet). So it can all be done. Yet we don’t do it because it requires thought and skill and fossil fuels are so cheap and they just power over all the problems.

        The real problem isn’t the disappearance of fossil fuels, it is the stupid squandering of attention to the fundamentals of growing food in a sustainable system. We had a nice discussion in class of how this particular farmer has transitioned to a very low till system (without benefit of Monsanto or Cargill) over the years, and has greatly increased the carbon content of his soils. Again, it’s not rocket science. It’s just tending to business.

        Humans will be condemned for lack of paying attention, IMHO.

        Don Stewart

        • In the oil and gas industry, it takes 17 years for an innovation to come into widespread use. Here, there doesn’t seem to be a profit motive, so I would expect the rate of uptake would be even lower.

          It is frustrating, I agree. I hadn’t realized until I did the research for The long-term tie between energy supply, population, and the economy, that until the ramping up of coal production, we could not make barbed wire. As a result, it was not practical to herd animals from one area to another (or for that matter, to contain them in the West). If we plan to use this approach, we need to get started while we can make barbed wire. I suppose it can be made from recycled materials as well. It is something we don’t think of as a limiting factor.

          • Don Stewart says:

            Gail
            This is speculation on my part. Cattle and other prey animals natural tendency in the presence of carnivores is to herd closely together. The carnivores keep the herd moving, and that dynamic is what makes the prey animals so valuable for building soil. The conventional alternative of just turning a few cows out into a large pasture insures that the cows will heavily graze the most nutritious plants, and those plants will have shallow roots. The cows will leave low-nutrient weeds alone. But if the animals are herded together, they have to eat all the plants. And then they are moved and the plants recover and grow deep roots.

            The way we keep the animals together today is with portable electric fences and portable water. The fences can be solar PV powered and that is frequently the cheapest method of electrifying them. We move the animals by just opening the fence and letting them into the next paddock–they go eagerly because that is where the fresh green grass is.

            The biggest problem I see is actually moving the water tank. If we have done a good job building permaculture type water management systems with plenty of ponds on contour, then the solution may be a simple as having a pond in every paddock.

            The confinement in a small area in the absence of electricity and barbed wire can perhaps be solved with herd dogs–maybe border collies. I heard a young man describing his experiences on a buffalo farm. The huge bison were penned in with flimsy wire. The rancher told him ‘they could easily break the fence down, but they know they aren’t supposed to’. If a couple of border collies are nipping at the cows heels keeping them in a tightly packed herd, perhaps the cows will learn that ‘they aren’t supposed to wander off’.

            Don Stewart

  8. Doug W. says:

    Gail – Congratulations on the recent Christian Science Monitor article. Good to see you are getting wider circulation. This is a great post. It is very frustrating to watch the current campaign here in the US. No one is talking about the central issue of our time! In regard to the safety net, it sounds like you are saying that peak oil may take us to the same place Republicans are talking about taking us intentionally–cuts or elimination of to social security, pensions,medicare.

    • seems if you want a safety net, you’d better think of setting up your own
      the big problem with safety nets though, is you can’t hold them up and fall into them at the same time

      • Don Stewart says:

        That is a wonderful last phrase…Don Stewart

      • If you can’t trust banks and insurance, it is hard to set up financial safety nets. This is a big reason why children have always been the safety net of choice. If you don’t have children, I suppose there might be groups you could affiliate with, or you might try to set up a close relationship with someone who needs a parent (nephew or niece without parents, for example).

        • But perhaps stocking a bit of food and other essentials isnt so bad, you’d be trading your paper money into physical objects of necessity instead (some think silver and gold is also good because of its intrinsic value being more usable in a situation where currency has collapsed). With current supermarkets only a short trip away, most people have moved away from the idea of pantries. I think one would be wise to invest some time into having a buffer in case troubles arise, as it can be rather terrible to find anything once hoarding starts. At least its a small safety net that one could circulate yourself so the food dont go bad in storage. I’d love to know of some website who suggests good storage facilities and what food and stuff to keep around.

    • Thanks. I understand Christian Science Monitor will be running more of my posts. They seem to have an issue with lots of images. Hopefully, this won’t be too big of a problem.

      Unfortunately, it was low oil prices that allowed growth, and allowed us to fund all of the programs we have today. It is hard for me to see a way that we can continue to provide as generous benefits, unless taxes are very high (including on international corporations, for example). I expect that either intentionally, or through collapse, we will find major changes are necessary. For example, it is hard for medical care to continue to take such a huge percentage (18% ?) of GDP. Somehow, we will need to collapse back to basics. Many fewer will work outside the home/farm, or if people do work outside the home/farm, they will get paid relatively less for it.

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  10. Bob Carver says:

    Gail,

    A great article with which I agree. Just one point, however, having to do with the statement, “High-priced renewables, such as off-shore wind and solar photovoltaic, can be expected to act in a similar fashion, because they add to the price challenge customers face.” With solar PV panels falling to well less than $1/watt, aren’t we likely to see this as a boon to consumers as they switch from high-priced grid electricity to self-generated electricity? Right now, PV panels represent only 1/3 of the cost of installing solar. In the future, those installation costs are likely to follow panel prices lower as well, so I see this as a technological boon for consumers (and a problem for the grid operators).

    • I don’t think that installation costs are going lower. They basically include a lot of human costs and fossil fuel costs.

      Costs are not properly calculated either. They do not count the cost of fossil fuel load-balancing that is required. Often they reflect the impact of subsidies as well, and these will go away as countries become poorer. I expect variable renewables will make the grid operate less long, because they add to the complexity of keeping supplies even. Any calculation of the benefit/cost of variable renewables should take this into account as well. All in all, I have a very hard time seeing that their contribution is positive, except in a few off-grid applications (such as pumping water).

      You may have seen this article yesterday The end of the honeymoon period for renewables. (Free registration required.)

      • Don Stewart says:

        I agree that renewables and most current industrial uses of electricity are not very compatible.

        I have lived for several days in an off-grid, solar house. It had a modest battery system. If you lived there, you just got used to the idea that there wasn’t a lot of electricity after dark. But it was convenient to be able to come into a dark house, flip a switch, and get a modest amount of light which let you easily navigate around. Then to bed and flip another switch and the light goes off. It’s like an oil lamp except its more convenient. During the daytime hours, you could operate electric appliances in the kitchen or power a drill or a hand held electric saw. So the electricity was quite convenient. To say that renewables are ‘useless’ unless they look like the current grid is, I think, wrong. Anybody who has camped can appreciate that a modest solar system will be convenient and useful.

        I can also imagine that some industrial applications would be appreciated. For example, solar could probably power a saw mill or a grist mill during daylight hours. Whether a solar PV system can manufacture a solar PV system is something I am not sure about. It may be wise to set up a PV system now which is not grid connected and get used to using it if you have the money to invest.

        In short, I see some uses for renewables, but they will require us to live quite differently than we have become accustomed to living. To sell them as ‘transparent’ is, I think, a mistake.

        Don Stewart

        • Bob Carver says:

          It’s pretty straighforward to simply install enough green batteries to last for several days. Lead-acid is the past. Nickel-iron batteries can last 80 years or more and they’re very green. You will end up willing them to your descendents!

        • Stu Kautsch says:

          I’m with *you* – I’d rather have *some* electricity than *none*. Dismissing alternatives because they don’t give you *everything* is the road to heartache (or worse).

        • Leo Smith says:

          “During the daytime hours, you could operate electric appliances in the kitchen or power a drill or a hand held electric saw.”

          Now try an MAKE that electric kettle or those electrical tools without a proper grid supply..

          People for some reason focus on the domestic part of electricity consumption.

          What you have to understand that if your whole grid is operating at a 15% capacity factor like a wind farm – or, worse, 10% like solar..then so is your whole industrial base. That essentially multiplies the cost of everything you do by 4-10.

          What that means is you pay say 5 times as much for an electric drill that you can only use 1/4 of the time. Which is a MASSIVE waste of materials.

          People simply do not appreciate what intermittency means: Its not just that stuff happens sporadically, its that you are spending far more on making the kit in the first place than it delivers in value.

          Think sailing ships. In essence the sailing ship died commercially because you can get far more tonne miles in a year out of the same ship if its isn’t subject to the vagaries of wind. And by mechanising it, it needs far less crew to run it as well.

          If your refrigerated truck can only run one day a week on the renewable powered railway, that means a lot of food spoils. You cant guarantee supplies to cities. In fact cities completely DEPEND on regular access to a lot of energy to survive, at all.

          Arguably pre-industrial conurbations are just small market towns only. Apart from a few ports which could be larger.

          Rome tried growing wheat in N Europe to feed itself. Basically by the time the horses had eaten most of it hauling it back to Rome, there wasn’t any left to eat.

          Humanity can survive on renewable energy. A small part of it anyway. Civilisation cannot.

          • Don Stewart says:

            I think when you actually get into it you will find that there are certain functions where electricity and certain tools are worth paying quite a lot for. I visited a community with a community saw mill powered by solar energy. The sled which carries the tree through the saw blade was pushed by humans. The saw was turned by solar PV electricity. I won’t deny that fabricating a saw blade is an expensive proposition in terms of a society short of energy. It is even expensive (in terms of human effort) to build the superstructure of the sawmill out of wood. But the value of a sawmill is very high. The alternative is to build log cabins out of whole logs notched with axes. Log cabins were the usual way of construction on the frontier in eastern North America. And when land was being cleared for crops, one had plenty of logs anyway. But pretty quickly it becomes necessary to make more economical use of trees, and one needs a sawmill pretty badly. So the cost of the metal blade and the cost of the solar PV may be quite a bit less than the value of the services that the sawmill can perform.

            Similarly with a grist mill. Someone recently made a movie based on a 16th century Flemish painting of a landscape dominated by a big windmill. Of course the windmill was expensive to build–but it was worth the effort because it facilitated the consumption of grains which produce a lot of calories. The windmill basically only functioned during the day after the miller and his family rose from sleep and got to work–and, of course, wouldn’t work if the wind wasn’t blowing. Whether you call 16th century Flanders civilized or not is an exercise in word play.

            The little creek near my house has quite a number of small dam remains. These were doubtless mills. The creek would not have supplied a reliable flow of water in the summer, so it worked only intermittently–most reliably in the spring. But the mills were deemed worth the trouble to build. Larger rivers with good gradients typically had a mill per mile.

            One creek not far from me still has a sturdy dam built by slaves which is about 25 feet tall. It is a beautiful job of construction. The mill itself was scavenged and only the rock mill race is left.

            So a lot can be done with a little when the tool is really needed.

            It’s also a mistake, in my opinion, to discount the value of salvage over the next 50 years. We are not suddenly going to reclaim the knowledge required to build dams and mills on small creeks to grind our grains. If we have an electric grain mill (I do), then having a solar PV panel on the roof to run that mill so long as it lasts and when the sun is shining may get us through some tough times.

            Permaculture people (at least those who survive) give a lot of thought to transition issues. One generally has to make enough money to pay one’s way, even if living very frugally. And, as a practical matter, that requires using things like 5 gallon plastic buckets. Miles Olson, writing in Unlearn, Rewild: Earth Skills, Ideas, and Inspiration for the Future Primitive concludes that the important thing is to get started. Don’t worry too much about conforming to someone else’s ideas about how things need to go. Just get into it and start doing it. My observation of young people actually living with solar PV off-grid tells me that they are probably making a wise choice.

            Don Stewart

            • Leo Smith says:

              If I was logging, I’d be using a steam powered saw running off wood chips🙂
              Damn sight more practical than solar panels that you cant possibly fix onsite.

              Given wood and a bit of iron ore you can bootstrap your way to nearly all the tools needed to make and repair a basic steam engine and a sawmill. And use the waste heat to keep your log cabin warm as well.

              But even there, you realise that a basic steam engine and saw depends on loads of other industries – copper pipes, glass for pressure gauges – lubricating oils and cotton waste to make seals..steam engines became possible when these industries existed: The basic blacksmithery is not QUITE enough to make a steam engine, although its close.

              I don’t think you have ANY idea of how much technology it takes to make a solar panel…its all very well saying ‘I can buy one and go off grid’ but that is only because an entire COUNTRY full of other industries is ON GRID, to make it. Given iron ore and wood, I could make a steam engine. Given copper and shellac, at a pinch I could make an electric motor. I could not ever make a solar panel. The actual process of refining silicon requires materials and facilities that are totally beyond any individual or small group. Let alone doping it and packaging it. I’d be hard pushed to make a battery as well. Lead I could probably smelt in a disgustingly polluting sort of way, but sulphuric acid? well give me the sulphur and I am halfway there..and maybe some sort of plastic could be made out of wood tars and wood fibres.

              So to pretend that running a sawmill on ‘sustainable solar panels’ is sustainable as a long term solution in the absence of a massive industrial infrastructure to support it, is self delusion of the highest order.

            • Don Stewart says:

              Leo
              By D Day, everyone knew how the WWII was going to end. There was no doubt that Britain, the US, and the Soviet Union were going to win. But if you were a soldier on an LST headed toward the beach, your problem was to live through this day.

              So if you ask how is the best way to optimize your chances for survival over the next few years, then solar panels may well play a part in your plan. You do have to get them while you can. And anything you plan to use them to run needs to be as maintenance friendly as possible.

              As time goes along, I think that electrical equipment will go by the wayside, and we will refigure out how our ancestors did it. If you take a look at Unlearn, Rewild, you will see some instructions for making snares to catch animals ranging in size from squirrels to deer. Why do you have to do that? Because those critters can eat everything you can grow and you will starve. You can, of course, also eat the critters, but after you have trapped them, there won’t be many left. If 7 billion people trap them, they will disappear very quickly.

              How do you make the snares? All country people used to know how. There are poor people today living on the fringes who make snares every day. The best material is wire. But snares can also be made out of lots of other materials. So part of your ‘collapse plan’ might be to stockpile a modest amount of ‘snare wire’ now. That doesn’t mean that wire will be available in 50 years…just that it’s perhaps a good idea for now. Same for PV panels.

              Don Stewart

          • Leo,

            You did a good job of explaining the problem. I know I tried to explain this issue to someone else by e-mail, and didn’t do it as elegantly.

            It is not the household sector that “kills us;” it is the industrial sector.

            We can use solar panels for quite a while with good batteries. But at some point, we stop being able to buy light bulbs and other equipment that the solar panels will run. You also have to keep repairing 100% of the infrastructure (water pipes, sewer pipes, electric transmission lines, major roads). This badly eats into the 10% or 15% renewable energy you have, or these things “go-away” as well.

          • Excellent point, well put. Sharing stuff will give us a bit more time but in the long run it’s going to be tricky.

        • Some electricity is indeed better than none. And I think there will be enough “junk” around for a long time for us to still harvest some use for electricity. I think what people need to figure out is what a “quality” electrical appliance really is. For example, its very convenient to have things working on 12v DC rather than 17.8v or something like that. Its also good to buy electrical things that are simple and servicable in construction as there might not be parts around in the future. Actually the latter is a big problem with all technological advancement. Its simply going too fast in that we are not able to establish a good standardized set of parts. Manufacturers want you really to buy the latest model and throw away the old one. This is hardly a very sustainable way of running the future, especially in a low energy/economy world.

          As consumers you have some influence over this, and the most important one is to push for longer guarantees in everything you buy. Here in Norway we have rather good laws around this so many bad quality goods are just filtered out by the sheer amount of returns they get. People also need to be wise about what to buy. Its really better to buy something with a 5 year track record for working fine than buying something brand new and hoping it will last a year. This speed of technology replacement is one of the worst effects of the free market economy – neither consumers or standards are able to settle before something new comes around.

          • The whole “parts” and “repairability” issue is a big one. I don’t see any move by manufacturers to make goods more durable, or parts more standardized, though. The assumption with anything smaller than a motor vehicle is that a person will throw the old one away, and buy a new one after a short time.

            One repairman I talked to claimed that the high efficiency washing machines that are being sold now (I have one) are harder to keep repaired than older, more traditional machines. There is such a diversity of expensive parts that repair companies don’t keep parts in stock–they order them from the manufacturer when they are needed. The machines are much more expensive to begin with–much more embedded energy. His view was that they didn’t last as long, either, before they need to be replaced. So while they may save some water and the energy used in heating that water, this savings would need to be compared to seemingly higher energy cost otherwise.

          • I have a 40 year old gas boiler, (furnace to colonials) it runs perfectly well but I know Im going to have to replace it soon
            I also know that whatever I replace it with will start to go wrong after about 5-7 years, and need replacing after 10, because it is just so complex with lots of electronic whizzy bits in it.

          • As an example my house was built around 6 years ago, and even though we had 5 years guarantee on the parts installed with the house, both the central vacuumer and ventilation system broke down after about 5.5 years – its almost as it was designed to last the guaranteed time but not longer. Fortunately the ventilation only needed a $10 part that was easy to change yourself, but the vacuumer had a faulty motor which would cost just as much a new machine to replace.

            As consumers we are often oblivious to these things, naturally a consequence of our “use and throw away” kind of life. The other day I found two 17″ Compaq LCD screens and some USB powered PC speakers in the electronics return bin outside a shop here. They both looked ok although they had gotten a bit of rain on them. I took them home, dried them up thoroughly, and wouldnt you know, both LCDs and the speakers work just fine! I cant understand why this went in the bin. Why not at least give it away to a flee market or something? This is the kind of behaviour that is truly ruining the world and makes me sad.😦

      • Bob Carver says:

        The article assumes tie-in to the grid. If you don’t tie-in to the grid, you have an advantage: outages on the grid don’t affect you. Nor are the installation costs as high. You do have to provide storage, but that’s relatively cheap, a one-time expense if you use the proper battery technology (Nickel-Iron batteries can last more than 80 years and don’t require a charge controller, plus they are a very green technology compared to lead-acid). Even without subsidies, I can buy a 235-watt PV panel for just $200 today. Those costs are going lower over time. Smart consumers are going to move to the technology which treats them best and PV has a long way to go.

        • Off-grid solar I can live with (but I don’t think we will be manufacturing them long term). It is the idea that adding intermittent renewables to the grid that I have a problem with. Maybe a little wind in can be added in nearby where wind energy is produced, but the farther away from that model you get, the worse it works.

          I was not aware that there are any batteries that work for 80 years. Wikipedia says “more than 20 years”. This reference says often lasts in excess of 40 years.

          The main issue with nickel-iron batteries seems to be the high cost of manufacture. Is this because of high energy requirements at the time of manufacture?

          • Bob Carver says:

            The problem with Nickel-Iron is that we are being ripped-off by the Chinese and the Russians, the two nations which still manufacture them. The two metals which make up the battery are two of the most abundant metals on Earth. Nickel is about $8/pound and Iron is so cheap I didn’t even look it up. The potassium hydroxide solution is dirt cheap as well.

            The only American manufacturers of Nickel-Iron batteries are actually taking 80+ year old Edison Nickel-Iron batteries, cleaning them up and re-selling them! A battery testing company in New Jersey took some Edison batteries from an old hunting lodge in New York, verified they were an average of 85-years-old, poured out the old electrolyte (some were bone dry, by the way), poured in new electrolyte and tested them. Good as new after 85 years. I can send you the PDF if you want to see the proof. The document is entitled, “Nickel-Iron, This all but forgotten technology has a very important place to occupy with users that desire very long life and the ability to suffer abuse in their battery systems.” It’s authored by Peter J. DeMar, Battery Research and Testing, Inc., Oswego, NY, USA, pjd@batteryresearch.com and appeared in an IEEE Journal (978-1-4577-1250-0/11/$26.00 ©2011 IEEE)

            Recently, Stanford researchers grew Nickel-Iron electrodes on graphene and found they could turn the Nickel-Iron battery into a supercapacitor. They could charge it in just two mintues and discharge it in 30 seconds. They believe it could finally realize Edison’s dream of powering electric cars and eliminating the internal combustion engine.

            • If they are not that hard to make, I would think someone would start making them. High prices always suggest to me that there is an energy-intensive process for making the batteries or some other problem that we are not aware of.

        • Leo Smith says:

          But that $1 a watt capital cost has to be assessed in the light of (sic!) the availability of sunlight. I dont have US figures to hand, being a Limey SOB, bit here you would be lucky to get 10% of that power out of it on an annualised average basis, and most of that in summer when you need it least.

          That puts the actual capital cost compared with – say – nuclear power – at $10 a watt,. or $10bn a GW. Compared with nuclear at say $5bn/GW, give or take, and nukes last longer..and take up less space.And need less maintenance..and don’t need batteries.

          THEN if you start thinking that winter is when you need the lights on, and summer is when the sun shines, you are looking at a battery store that can last through the winter.

          These arguments for renewables are just the same as arguments for ‘no peak oil’ – they rely on never looking at the costs – in material or energy terms – of achieving the desired results.

          There is an old saying in these parts “If it were that easy, everyone would be doing it”. Indeed. In a society that is capable of designing a portable computing device that can probably do in 20 minutes what a team of mathematicians would have spent 20 years doing, or send a robot top Mars, we can’t produce a reliable cost effective way to harness and store sunlight or wind in bulk. That should tell you something about the relative difficulty of the projects.

          I have said it before and I will say it again. As an engineer, I don’t ask the question that physicists do – ‘can it be done’? I ask the question ‘How can I build it’?. Because that introduces the whole gamut of technology and practical real world systems into the equation. Not just ‘is there enough sunlight to run the USA’? but ‘Given that there is, how do you harness it at sane cost, low environmental impact, and high availability and dispatchability’ and the answer is ‘you can’t.’ And if you could, we would have done it years ago.

          And to build such a system – I even costed it out for the UK – you need cheap fossil fuel to build it because my calculations for a all renewable electricity grid – just electricity – not even transport or industrial fuel replaced – came out at £9.97p per unit electricity. Electricity that wholesales at £0.05p, currently.

          Now imagine having to repair that grid, with energy that expensive.

          That cheap Chinese solar panel is cheap because China used cheap dirty polluting coal to drive the chip foundries, and effectively slave labour to build it. A point Gail has made very well elsewhere.

          Everybody, myself included, wants renewable energy to be a simple clean cheap reliable way to occupy a few unused acres in uninhabited parts of the country and run the world off. But like David Mackay (http://www.withouthotair.com) as much as we like renewable energy, we also like, trust, and respect mathematics.

          You seem to trust engineers to deliver you solar panels I-Bling and windmills. Why do you not trust engineers when they tell you ‘you can have em, we can make em,. but a solution for the civilisation, they ain’t!’

          I am aghast at the level of denial that exists in the proponents of renewable energy. They are deluding themselves. Some partial solutions exist – nuclear energy is one. And they need looking at, but renewable energy is not a solution for anything beyond keeping a car battery charged up in summer with solar, or in winter, with wind. And you can’t run civilisation of banks of car batteries, or we would be doing it already.

          Peope like to cite Germany as a country that has succeeded. But the reality is that whilst the headline figures for German renewable generation are rosy, the reality behind them is far less so. Industrial electricty has to be subsidised by swingeing tariffs that consumers pay. Despite generating vast amounts of renewable energy they need to build new coal plant to guarantee supply, and they switched from export to net importers of (French nuclear/Austrian coal) electricity when they dumped half their nuclear fleet. And the grid is becoming unstable enough to cause some industrial concerns to have to install – you guessed it – car batteries. At their own cost, to keep a reliable grid available.

          When you look at the alternatives once the rosy glasses of renewable energy are removed, the stark facts are that we have absolutely no option whatsoever but to continue to burn fossil fuel: To stop doing that would destroy far more of civilisation and result in far more deaths than any putative climate change ’caused by CO2′ could ever do.

          And as fossil fuel climbs in price, society has to change to accommodate that – the whole thrust of Gail’s calculations is to show that this is already happening. Those societies that abandon prejudice and engage in accurate cost benefit calculations will fare better. Those that stay affixed to faith based policies and fantasy will destroy themselves.

          And the results of those calculations show that, right now, you need to burn coal and gas to make electricity, and probably coal, as gas is a potential feedstock that is better for transport fuel synthesis. If coal runs out, the logical switch is to advanced nuclear power – its way cheaper and cleaner and safer than any alternative. BUT that only solves electricity. Not how to run the rest, especially transport.

          That is the least worst alternative. On the numbers. And its not an attractive prospect either. It means significant changes are inevitable. It means we are all going to suffer reduced standards of living. It means the days of private motoring and cheap air transport are probably numbered. It means that life expectancy will fall, and it means population will probably have to fall – that or standard of living, even faster.

          It probably means a resurgence in railways – especially high speed transcontinental ones. It probably means a new breed of transport ships running on nuclear power. It probably means food and energy will become the major costs in anyone’s budget that doesn’t happen to be obscenely rich.

          It means the end of the consumer society (which I look forward to!) It probably means the end of globalisation as the de facto way to generate more profit. It means a resurgence in maintenance and repair and refurbishing industries instead of manufacturing, marketing and distribution.

          That’s making the best choices we have. Making worse choices means the total slow collapse into situations of extreme social and political instability, of entire nations. And the worst of all things is to pin our faith in things that we know cannot ever work..Even if politicians (or ex-politicians with axes to grind and films to make) with no competence in those areas assure us that they will, for their own short term benefit.

          • Michael Lloyd says:

            Probably this is worth a read:

            Generating the Future: UK energy systems fit for 2050
            http://www.raeng.org.uk/news/publications/list/reports/Generating_the_future_report.pdf

            A quote from the conclusions:

            “The experience of engineers shows that implementing fundamental changes to a system as large and complex as the UK’s energy system to meet the 2050 greenhouse gas emissions targets will bring with it many challenges for government, business and industry, engineering and the public alike. Turning the theoretical emissions reduction targets into reality will require more than political will: it will require nothing short of the biggest peacetime programme of change ever seen in the UK.”

            • Leo Smith says:

              And a change we simply cant afford to make, just to achieve and arbitrary target that has nothing to do with emissions reduction or generating usable electricity.

              We call it ‘green willy waving’ My renewable is bigger than…

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